Acsa deal still up in the air
A long-running battle between the state, Acsa and some of the airports management company’s minority shareholders may sound alarm bells for private investors looking to partner with the government
In early October, President Cyril Ramaphosa told investors gathered in the venerable Claridge’s Hotel in London that SA is open for business. The government wants to secure R1.2-trillion in investment in the coming years and, along with various efforts to ease policy uncertainty, Ramaphosa reportedly said the state is talking to possible strategic equity partners for some of our beleaguered state-owned entities (SOEs), notably SAA.
But a group of minority shareholders in another state aviation asset, the Airports Company SA (Acsa), believe their experience serves as a cautionary tale to any private investor pondering a partnership with the government.
On Wednesday, Acsa’s minority shareholders were set to face off with the government and the SOE in court. It’s the latest skirmish in a long-running battle over buying the minorities out at a fair price, in the face of what they have called "oppressive conduct".
The minorities in question are Oppressed Acsa Minority 1, formerly known as African Harvest Strategic Investments, and Upfront Investments 65. Together, they own 1.8% of the SOE.
The department of transport is the majority shareholder in Acsa, a regulated monopoly that operates the country’s nine main airports. It is seeking to have set aside a 2017 court order in which Acsa and the minorities agreed to jointly appoint an independent referee, advisory firm RisCura, to value the company so Acsa could buy out the minorities.
The court order came about after the parties agreed to settle a 2015 case brought by the minorities against Acsa and the state, in which they alleged oppressive conduct under section 163 of the Companies Act.
The minorities’ unhappiness can be traced back to 1998, when the state offered empowerment investors the opportunity to take up a stake in Acsa on the back of a promise that the company would be listed.
Years later — and after changes in the government’s approach to SOEs — that listing has never taken place.
Instead, as the minorities would have it, Acsa’s commercial objectives have been diluted by the state’s imposition of developmental mandates — in contrast with commercial mandates — on SOEs. They say this has contributed to a number of questionable investment decisions, such as the building of King Shaka International Airport near Durban ahead of the 2010 Soccer World Cup.
The regulatory environment has also been a problem, the minorities say, allowing tariff decisions that have been prejudicial to Acsa and its shareholders. The failure to better control fruitless and wasteful expenditure is a further issue they highlight.
These factors, among others, they say, amounted to oppressive conduct.
The specific question of oppressive conduct was never fully ventilated in court. But the court order allowed the agreed referee to determine what constitutes oppressive conduct in its valuation of Acsa.
In February 2018 RisCura valued Acsa’s shares at R77.92 — putting the group of minority shares at a little over R700m. This amount included the returns RisCura deemed the minorities to have forfeited over the years due to oppressive conduct.
But in mid-2018, after the minorities attempted to have the RisCura report adopted by the court, the department appealed the 2017 order and applied to have it rescinded or set aside. Acsa soon also filed a counterapplication to have the report set aside, and asked the court to determine its share value after hearing expert testimony, and to allow for questions on oppressive conduct to be addressed.
The department has argued, among other things, that Acsa’s legal representatives had no grounds to agree to the original settlement, as it was not approved by the Acsa board. It also says the settlement contravened the Public Finance Management Act (PFMA), as the share buyback did not receive approval from the National Treasury.
The state also argues, in line with Acsa’s objection to the RisCura report, that the valuation requiring payment of more than R700m would "not only have a devastating impact on Acsa’s financial reserves, it would also have a direct and negative impact on [the] nation’s fiscus and the public interest".
For its part, Acsa has denied the oppressive conduct alleged by the minorities and that RisCura accounts for in its valuation. In court papers, it says the decision not to list was based on "the importance of Acsa’s public interest role in managing the nation’s airports as a catalyst for economic growth". The board’s decisions, it argues, affect all shareholders in the same way and cannot be unfairly prejudicial to the minorities.
Acsa also claims that RisCura’s valuation is flawed and that a separate valuation, done specifically for the airports company, puts the share at a much lower R36.36.
But the minorities want the state’s bid dismissed with punitive costs.
In court papers, Alun Frost, adviser to the minorities, says the state’s application "smacks of bad faith and opportunism, and amounts to the continuation of the oppressive conduct". He says, contrary to the government’s allegations, the transport department was fully aware of the settlement agreement. Also, he says, the requirements of the PFMA were not triggered, as the minorities’ stake, at less than 2%, does not constitute a "significant shareholding".
Whatever the outcome of the case, the protracted acrimony over what started out as an empowerment deal almost two decades ago raises questions about what private shareholders take on when they invest in the state.
Independent transport economist Joachim Vermooten says it is very likely that any possible investors in SOEs would look at the "trend of government decisions" before deciding to invest.
Vermooten’s research on privatisation in the aviation space has shown that "the whole world is enjoying the benefits" of greater privatisation. This allows "governments [to] have more money to spend on government business — it’s more focused". But, he says, SA is not doing it.
The lack of clarity over what constitutes a developmental mandate further complicates matters, says Vermooten. "It has been used for all kinds of things that can’t be justified in any kind of business situation. We need to return to normal financial disciplines of risk and reward."
The department of transport did not respond to questions from the FM.
However, Frost tells the FM that the case highlights how the state cannot decide what to do with private shareholders. "It’s absolutely impossible under the current government’s ambivalence around economic policy to have a clear answer," he says. "I don’t think any private sector investor would invest in a minority stake in an SOE."
[The state's application] smacks of bad faith and opportunism, and amounts to the continuation of oppressive conductAlun Frost
In a recent statement from the ANC’s national executive committee, the ruling party re-emphasised its support for seeking out strategic equity partners for SOEs. But private business has warned that SA "needs to go a little further".
As a minority partner, "you are not able to drive the agenda", Business Unity SA president Sipho Pityana said in a recent interview.
He gave the example of Telkom, which achieved a significant turnaround — but only after the majority of the company was sold via a listing, with the government retaining a minority stake.
He said he hopes the ANC will not be closed to the idea of privatisation of some SOEs. "In the hands of government they might close and cost us more jobs," he said. "And in the hands of the private sector they might grow and secure jobs."
Acsa has, in comparison with other SOEs, so far been a good performer and has yet to ask the government for any financial assistance. This notwithstanding — and even as the litigation has dragged on — the company has faced its own set of controversies in recent years. Former CEO Bongani Maseko’s term ended under a cloud of allegations of misconduct. He is yet to be permanently replaced almost a year later, while Bongiwe Mbomvu remains acting CEO.
The situation has not been helped by the high turnover of transport ministers in the portfolio — four since 2015. The successive changes are cited in the department’s papers as a reason why the court should condone its failure to challenge the 2017 court order sooner.
Acsa remains profitable, though its latest results revealed that, despite a 5.6% increase in revenues, its net profits had slid almost 59% thanks to the effect of a weaker economy as well as sharp cost increases. Cost were driven predominantly by increased employee costs, which rose almost 17%, as well as security costs, which were up 54%.
Nevertheless, Acsa believes it has the right "processes, governance and culture of financial management and cost control" to manage any challenges posed by the wider economic environment and other possible setbacks. The company has reduced its debt levels from R17bn to R6.6bn, despite reductions in regulated tariffs, to enable it to make future infrastructure investments.
The company’s financial planning includes a number of scenarios, "including different possible outcomes of the litigation process", says an Acsa spokesperson. But until the litigation process is finalised, the figure of R700m "remains moot and speculative".
Nevertheless "any possible figure would represent a cost that the company would have to manage carefully", the spokesperson says. "We would endeavour to ensure that service levels are maintained and that investment in new infrastructure can continue."